THE FUSE

Minister of finance Enoch Godongwana has announced the first adjustment to South Africa’s official inflation target in 25 years, arguing there are more benefits than setbacks to a tighter and lower inflation target.

“Today I announce a new inflation target for South Africa of 3% with a one percentage point tolerance band. This decision follows agreement between the governor of the Reserve Bank and my consultations with the president and the cabinet,” the minister said in his tabling.

The minister tabled his medium-term budget policy statement (MTBPS) in parliament on Wednesday. The Sunday Times reported at the weekend that Godongwana would announce an official inflation target of 3% from a broad target band of 3%-6%.

“The revised target will benefit all South Africans, especially poorer households. Although the impact on government finances will be mixed in the short term, this change is expected to reduce the cost of living and borrowing, while boosting economic growth and revenues in the years ahead,” the MTBPS said.

Speaking at a briefing in parliament ahead of the tabling, Reserve Bank governor Lesetja Kganyago did not rush to take credit for the inflation target adjustment, despite being a vocal supporter of the move even when Godongwana was ambivalent.

“It’s not my target; it’s the country’s target. The minister and I have agreed on a target of 3% in line with our peers. It’s something that the Treasury and the Reserve Bank have studied for an extensive period,” he said.

South Africa’s inflation target will be more in line with its trading partners and peer economies, making the economy more competitive. Household spending and private investment will rise due mainly to higher real disposable income and lower borrowing costs
— Medium-term budget policy statement

Kganyago added that every monetary policy had trade-offs and for a sound policy to be adopted, the benefits must outweigh the cost. If the tighter target helps the Bank fight inflation, that inflation will be taken out of the decision-making processes of investors and households.

The MTBPS document said the lowering of the inflation target to 3% had “important, multi-stage implications for public finances”. The document admits that a tighter inflation target will initially slow growth and add debt pressure.

“In the short and medium term, targeting lower inflation will result in slower nominal GDP, which in turn results in reduced revenue projections and a less favourable debt-to-GDP ratio,” the MTBPS document said.

Still, the MTBPS says, “the long-term benefits clearly outweigh the short-term concerns”. The document says lower inflation will support higher levels of real economic growth, allowing the South African economy to grow at similar levels to its emerging economy peers.

“South Africa’s inflation target will be more in line with its trading partners and peer economies, making the economy more competitive. Household spending and private investment will rise due mainly to higher real disposable income and lower borrowing costs.”

The Sunday Times reported that while Godongwana took a swipe at Kganyago in August for announcing that the central bank’s monetary policy committee would work with a 3% target in mind, the minister has since had a change of heart. Kganyago has spent much of the year advocating for a lower and tighter official inflation target as a way of managing inflation, ensuring long-term price stability and preserving the value of the currency.

The minister added that the negative impact of the fall in revenues on the budget balance would be counteracted by the reduction in debt-service costs and the fiscal balance will continue to improve steadily over the forecast period.

Global inflation is expected to continue easing over the next two years, led by [possible] lower energy and food prices. However, renewed trade disruptions, [possible] higher energy costs or the delayed effects of tariff measures could increase price pressures
— MTBPS

“[There is likely to be] a slightly higher debt trajectory as a result of lower nominal GDP, although still stabilises in the current year. However, the cost of servicing government debt is lower due to improved sentiment as the fiscal position improves,” the MTBPS document said.

The MTBPS contains data which illustrates a 75 price point difference in the projected 16-year increase to the cost of living between a scenario with a 3% official inflation target and one where the official inflation target is 4.5%.

“The cost of living increases exponentially with a 4.5% inflation target versus 3%,” the document said. The document projects that under a 3% official inflation target prices double in 24 years, compared to prices doubling in 16 years under a 4.5% inflation target.”

Data from the MTBPS showed that South Africa had a broad inflation target band compared to countries like Brazil, the Philippines, Mexico, Colombia, Hungary, Poland, Peru, the Czech Republic, Thailand, Australia and New Zealand. It was also the only one of these countries with an upper target band of 6%.

“Global inflation is expected to continue easing over the next two years, led by [possible] lower energy and food prices. However, renewed trade disruptions, [possible] higher energy costs or the delayed effects of tariff measures could increase price pressures.”

The National Treasury and the Bank have spent months investigating the economic impact of a lower and tighter inflation target under the auspices of the Government Technical Advisory Centre.

Unions, civil rights groups and even some economists have slammed reports that a lower inflation target would be announced, saying this would only benefit banks and lenders and add pressure to businesses and households already struggling with escalating costs.

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